Corporate Social Responsibility (also known as CSR, corporate conscience, and corporate citizenship) is the integration of socially beneficial programs and practices into a corporation’s business model and culture. It is a method of engaging and committing the corporation to undertake activities which meaningfully contribute towards economic, social, cultural and environmental development causes.
CSR was introduced and made mandatory under Section 135 of the Companies Act, 2013 (Companies Act) which came into force from April 1, 2014. As per the provision, every company (both private and public limited) in India which qualifies the minimum threshold criteria of, networth of INR 500 crore (5 billion) or a turnover of INR 1,000 crore (10 billion) or the net profit of INR 5 crore (50 million) in the immediately preceding financial year, is required to spend a Minimum CSR Amount (as defined hereinafter) on Corporate Social Responsibility activities which are not in pursuance of its normal course of its business.
This article enumerates the mandatory requirements for undertaking CSR activities under the new Companies Act and includes the key changes recently introduced through the Companies Amendment Act, 2019[1] (Amendment Act). The changes introduced under the Amendment Act, have been italicized for ease of reference.
- The companies are mandatorily required to spend at least 2% of their average net profits made during the three immediately preceding financial years or where the company has not completed the period of three financial years since its incorporation (Minimum CSR Amount), on CSR activities in pursuance of its CSR policy;
- The ‘net profits’ means the net profits of a company as per its financial statements and does not include (i) any profit arising from any overseas branch or branches of the company whether operated as a separate company or otherwise; and (ii) any dividend received from other companies in India, which are covered under and complying with the provisions of Section 135;
- The definition of company means private as well as a public limited company including its holding or a subsidiary and a (foreign company)[2] having its branch office or project office in India;
- The companies are required to constitute a CSR Committee of the Board consisting of three or more directors out of which at least one director must be an independent director;
- In case the company is not required to appoint an independent director, it must have two or more of its directors in the CSR Committee;
- In case of a foreign company, the CSR committee is required to have two persons out of which one is a specified[3] person and other is nominated by the foreign company;
- The composition of the CSR Committee is required to be disclosed in the Board of Directors (Board) report;
- The CSR Committee is required to (a) formulate and recommend to the Board of Directors, a CSR Policy which will indicate the activities to be undertaken by the company in the areas specified in Schedule VII of the Companies Act; (b) recommend the amount of expenditure to be incurred on the CSR activities; and (c) monitor the CSR Policy of the company from time to time;
- The Board is required to (a) approve the CSR Policy for the company after taking into account the recommendations made by the CSR Committee; (b) disclose contents of such CSR Policy in its report and also place the such contents on its website; (c) ensure that the activities as are included in the CSR Policy are undertaken by the company;
- The company is required to give preference to the local area(s) around it where it operates for spending the amount earmarked for CSR activities;
- The Board is required to report the reasons in its Board’s report if the company fails to spend the Minimum CSR Amount;
- In case the unspent amount relates to any ongoing project undertaken in pursuance of its CSR Policy, such unspent amount is to be transferred to a special account called Unspent CSR Account (opened with a scheduled bank in this regard) within 30 days from the end of the financial year. Such unspent amount is to be spent by the company in pursuance of its CSR Policy within a period of three financial years from the date of such transfer, failing which, the same is to be transferred to a fund specified in Schedule VII of the Companies Act within 30 days from the date of completion of the third financial year;
- In case the unspent amount does not relate to any ongoing project, the company is required to transfer such unspent amount to a fund specified in Schedule VII, within a period of 6 months of the expiry of the financial year;
- In case of contravention in transferring the unspent amount as above, the company is punishable with fine ranging from INR 50,000 (0.05 million) to INR 25 lakhs (2.5 million) and every officer in default is punishable with imprisonment for a terms upto 3 years;
- The Central Government may give such general or special directions to a company or class of companies as it considers necessary to ensure compliance of CSR provisions;
- CSR expenditure includes all expenditure including contribution to corpus, for projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee but does not include any expenditure on an item not in conformity or not in line with activities which fall within the areas or subjects specified in Schedule VII.
- Expenditure incurred by foreign holding company for CSR activities in India will qualify as CSR spend of the Indian subsidiary if the CSR expenditure are routed through Indian subsidiaries and if the Indian subsidiary is required to do so as per Section 135 of the Act[4];
- CSR activities can be undertaken through a company established under Section 8, registered trust or a registered society provided such entities have an established track record of 3 years in undertaking similar programs or projects;
- The company may collaborate with other companies for undertaking CSR activities or may build CSR capabilities of their own personnel or of their implementing agencies with an established track record of atleast 3 financial years but expenditure on should not exceed 5 % of the total CSR expenditure of the company in one financial year.
The author is a Corporate and M&A lawyer at Sarin Partners Advocates & Legal Consultants. The views in the article should not be construed as legal advice. Please contact the author for any clarification.
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[1] Published in Gazette on July 31, 2019 however yet to be enforced by a notification.
[2] Section 2(42), Companies Act, 2013 read with Rule 3(1), Companies (CSR Policy) Rules, 2014.
[3] Under Section 380(1)(d), Companies Act, 2013.
[4] Circular 21/2014 dated June 18, 2014.